RBA Lowe: Inflation Close to Point Where Sustainably in Target Range
- Published on
- 09 Mar 2022, 09:30 AM
--Plausible cash rate will be increased this year
--Recent Europe developments added to complexities.
--Will respond as needed and do what is necessary to maintain low and stable inflation
--Recent inflation lift, Ukraine war brought Australia inflation closer to point where it is sustainably in target range
--Risk of waiting too long but also risk of moving too early
By Sophia Rodrigues
(Sydney, March 9, 2022)—Inflation in Australia is closer to the point where it is sustainably in the target range due to a combination of recent rise in inflation and global developments, Governor Philip Lowe said Wednesday.
For the first time, Lowe said in a prepared speech that “it is plausible that the cash rate will be increased later this year.”
To be sure, Lowe has made the same comment on the plausibility of rate rise this year several times in the past month but those were in response to questions.
The speech titled “Recent Economic Developments” was delivered to the AFR Business Summit.
“The recent lift in inflation has brought us closer to the point where inflation is sustainably in the target range. So too have recent global developments,” Lowe said.
He added that the RBA is “not yet at the point” where it can conclude inflation is sustainably in the range and hence it has scope of wait and assess incoming information.
The RBA can be patient in a way that countries with substantially higher rates of inflation cannot but then went on to mention two issues he is paying close attention to.
The first is the persistence of supply-side price shocks and the extent to which developments in Ukraine add to these supply-side inflation pressures. The second is how labour costs in Australia evolve.
Lowe said the Ukraine war and the sanctions in Russia have created a new supply shock that is pushing prices up, especially for commodities, and this will extend the period of inflation being above central banks’ target.
This runs the risk that the low-inflation psychology that has characterised many advanced economies over the past two decades starts to shift.
If so, the higher inflation would be more persistent and broad-based, and require a larger monetary policy response.
In this regard, Lowe made a very important point about market pricing which suggests CPI inflation will decline from the current high rates in the North Atlantic economies to around 2% without real interest rates even going into positive territory.
“A shift in inflation psychology would challenge this view, so this is a critical issue,” he said.
On domestic labor costs, Lowe made specific mention of latest wage price index including bonuses and average hourly earnings, in addition to wage price index. The overall message was little-changed from recent comments but Lowe talked about uncertainties.
One of them was how wages would response to the current higher rates of headline inflation.
“There is a risk if these higher inflation rates are sustained as a result of a sequence of negative supply shocks, that wages growth picks up more quickly than forecast as workers seek compensation for the higher inflation,” he said.
Lowe ended with a commitment to respond to inflation pressures so the RBA can achieve sustained period of low unemployment.
“The Reserve Bank will respond as needed and do what is necessary to maintain low and stable inflation in Australia,” he said.
--Contact: sophia@centralbankintel.com